European companies may have underestimated growth potential in Asia, preferring to invest closer to home and relying more on direct exports to Asia than on building up extensive sales networks there. These are among the reasons why Europe lags behind Japan and the United States as an investor in the region, according to a report on European Union direct investment in Asia. The joint European Commission-UNCTAD report recommends that the European Union should consider extending its investment initiatives to the whole of Asia and improve coordination between them, while Asian countries could consider further liberalising their investment regimes and improving legal certainty and transparency for firms investing on their territory. The report also notes that the European Commission sees compelling reasons for starting work on a comprehensive multilateral framework for foreign direct investment (FDI). The report will be discussed by top businessmen and experts at a joint European Commission-UNCTAD conference in Geneva on 1 April 1996.

The aim of the report, prepared jointly by the European Commission and UNCTAD, Division on Transnational Corporations and Investment, is to develop a clearer picture of European Union FDI in Asia and to examine policy implications arising from the findings. Reactions to the report from business circles will help the European Union formulate a detailed investment strategy in order to plug the gap that exists between European investment and that of its key economic partners. The findings of the report and the feedback from business circles are also of interest to Asia, for attracting additional European Union investments to the Asian region. They are of interest to others as well, such as investors from the United States, Japan and the developing Asian region, as greater attention by European Union investors to the region would mean increased competition for them.

"Improving FDI flows from Europe to Asia is in the interest of expanding world trade, opening new market opportunities and deriving maximum benefits from the comparative advantages in the two regions", according to Rubens Ricupero, Secretary-General of UNCTAD. "This Report is a contribution to the better understanding of the dynamics and problems involved in the process of cooperation between the two regions."

Diagnosing the problem

The European Union has lagged behind the United States, and even further behind Japan, in its direct investment in developing Asia. However, the importance of European Union investment in the region varies considerably from country to country: its share of FDI in the Republic of Korea, for example, has been growing, while its share of total FDI in China has declined since 1985, as has its share in ASEAN.

Developing Asia is the world´s most significant developing region in terms of inward FDI, having overtaken Latin America and the Caribbean in the 1980s. Between 1988 and 1993, developing Asia´s inward stock of FDI doubled - an increase unrivalled by any other developing area. Now almost half of all the FDI stock in developing regions is in this area. Investment flows to developing Asia reached an estimated $59 billion in 1994, as against $32 billion in 1992.

The report cites several reasons for Europe´s poor performance. The growth potential of the dynamic Asian economies appears to have been underestimated by European firms in the early stages of expansion of those economies. Opportunities closer to home, arising from European Union integration, successive enlargements of the Union and the changes in central and eastern Europe further helped to divert business attention from Asia.

There may also have been inadequate recognition of the significant relaxation of restrictive regulatory practices that have occurred throughout much of East and South-East Asia.

The strategies of European firms themselves have also played a part in limiting their involvement in Asia. They have relied more on direct exports than on opening their own representations and establishing extensive marketing networks on the ground. This has frequently placed them at a disadvantage for investment, as well as trade. Japanese and United States firms have worked more assiduously at building lasting links as well as core networks in the region. These have given them a competitive edge over their European counterparts.

Governments on both the Asian and European sides are now making a determined effort to improve the climate for investment, which received a boost at the Asia-Europe Meeting in Bangkok on 1 and 2 March 1996. In Europe, efforts continue to address regulatory and other obstacles to investment, both at the bilateral and multilateral levels. In Asia, the regulatory and business environment is becoming increasingly favourable as regulatory regimes are liberalised. Governments across the region are undertaking more and more initiatives to promote inward FDI. There is much, however, that remains to be done.

What policy-makers could do to boost investment...

The study concludes that additional steps could be considered by policy-makers in Europe and Asia, such as:

Extending existing European Union programmes, as necessary, to cover the whole of East and South-East Asia and ultimately South Asia as well.

Improving co-ordination between initiatives established at the European Union level and actions undertaken by individual member States.

Establishing one or more Europe-Asia Management Centres in the European Union to attract business students from Asia, thereby promoting mutual understanding and personal networks.

The study concludes that the main drive in the effort to extend and deepen the economic links between the European Union and Asia can only come from business itself. European Union firms must recognise that a stronger European Union presence in this region is essential for their future global competitiveness.

There are encouraging signs that European firms are waking up to the need to invest more in Asia and to develop closer links through co-operation with local enterprises. This study invites companies to consider several ways of increasing their presence in Asia, notably by:

Closer co-operation between firms, acting individually or via their various national and European level organisations, to make full and efficient use of the various FDI promotion programmes.

Making use of the openings provided by the substantial infrastructure projects in Asia in order to establish a long-term presence in the region.

Maintaining and improving their relative FDI position in South Asia, an important market in its own right and a potential alternative point of entry to the East and South-East Asia.

Small and medium-sized companies must be as ready as larger firms to develop trade and investment strategies which will enable them to engage constructively in the further development of the region to the mutual benefit of both the European Union and the countries of Asia.